What Is The Difference Between A Holding Company And An Operating Company?
Holding companies and operating companies play different roles in a group structure, such as a dual-company structure.
In these structures:
- An operating company is responsible for the day-to-day management of the business. It is often the subsidiary of the holding company.
- A holding company owns a company’s assets (such as intellectual property, stock and equipment used by the operating company, real estate). Although it controls the operating company, it does not participate in operational decision making, or create any goods or deliver any services.
An operating company will take care of all the operational needs you’d expect a business to take care of – such as hiring staff, entering into contracts with staff, entering into contracts with consumers, suppliers, manufacturers, and conducting the actual day-to-day business of producing goods or services.
A holding company is like a distant parental figure – and is also known as a parent company or an umbrella company. Though a holding company does not usually participate in day to day operational decisions, it can still have some management oversight and control the operational company’s policies.
Setting up a company structure where there is a holding company on top of your operating company is more complicated than a simple company set up, and involves more ongoing compliance. However, it is a useful structure for the protection of a company’s assets.
An example of how a holding company provides protection is if the operating company goes bankrupt. As the company does not technically own assets such as intellectual property, creditors cannot pursue these assets as they are held by the holding company. In this way, holding companies offer an added layer of protection.
As well as asset protection, other benefits of a holding company include lowering debt financing costs, and liability protection. In some cases, the holding company can also be liable, if for instance the company has committed fraudulent acts.
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